Markets across the world are likely to take another tumble if, as expected, Fed chairman Ben Bernanke gives out more signals about retracing QE3, though it is reasonably certain there won’t be a sharp cut. Indeed, given the US economy is not out of the woods, the QE3 withdrawal may not even be unidirectional; some small cuts could be made to test the waters and, if need be, bond purchases can be stepped up again if the economy reacts adversely—the IMF has reduced its 2013 target GDP to 1.9% versus 2012’s 2.2% because of the adverse impact of the US sequester; as more unemployed join the queue for jobs, the unemployment numbers could also rise along with greater jobs creation. In the short run, however, the impact is likely to be high on the Indian economy—the rupee falling to an all-time low of 58.77 to the dollar just confirms this. Given how India got a lot more FII flows during QE3—over $30 billion as compared to $22 billion in QE2 over a 12-month period in each case—it is reasonable to expect a slowing of flows. Indeed, given that the higher FII flows took place at a time when the US economy was trending up and the Indian one was trending down makes it clear the role of QE3 in propping up flows was considerable.

That said, there are mitigating factors, apart from the fact that cuts in QE3 will keep commodity prices soft. For one, global funds need to chase growth and if India is offering that, this is where they will be tempted to come. So, even after a record CAD of 6.7% of GDP in the December quarter, FII flows continued to pour in and crossed $5 billion in December 2012 and remained at nearly that level for the next two months; after dropping in response to a tepid budget, FII flows were back to $4.3 billion in May 2013—a period when India’s growth was falling, the US was rising and the difference in US and Indian bond yields had fallen significantly compared to what it was when QE3 began last September. At a likely 6% in FY14, India will be growing three times faster than the US and, if a few projects take off, the pace of investment will pick up—as FE has reported over the past month, large infrastructure projects relating to the dedicated freight corridors are moving along at good speed with land acquisition also proceeding smoothly. India has been an average performer this year, doing better than Brazil and Korea, but worse than China and Taiwan—despite getting $15 billion of FII flows, the Sensex returns are minus 7.7% so far this year thanks to a weak rupee. But India is cheaper than its peers, which could prompt fund managers to either stay put or add to their portfolios.